Among the many industries facing pressure as a result of the current lockdown, consumer lenders face particular challenges in assessing the affordability of new or altered lending under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) for borrowers who may have already suffered material changes to their income or anticipated future income as a result of COVID-19 related issues.
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To assist, the Commerce Commission has recently issued specific guidance which seeks to offer some comfort to consumer lenders who are trying to understand their statutory obligations and the Commission’s intended approach to enforcement. The guidance (available here) addresses various important questions, including:
1. How will the lender responsibility principles apply?
The CCCFA sets out various lender responsibilities, including making reasonable inquiries so as to be satisfied that loans are suitable and affordable, and treating borrowers ethically. These requirements still apply, although the Commission clarifies that its approach to enforcement will be “strongly informed” by current circumstances.
Reasonable inquiries therefore still need to be made. In particular, when making inquiries, lenders should still check the purpose of the loan, required term, what form of credit is required, and how the borrower intends to make repayments. The Commission notes that “borrowers may have difficulties obtaining the supporting information and documents that would ordinarily corroborate an application” and so confirms that information can be provided verbally, with verification of hard copies to follow when practicable.
The Commission notes specific factors that it may be reasonable to consider, including: the strength of the borrower’s credit, income and repayment history; changes in income caused by COVID-19; likely duration of financial stress; expectations of future likely income; or remedial steps the borrower is taking. As for repayment holidays and similar relief, the Commission identifies certain “key messages” to be communicated to borrowers:
If deferring payments
Make clear: that no payments will be made during the period of the deferral; the period of time for which payments will be deferred; whether the borrower will be charged interest on the loan during the period of the deferral (and therefore whether the loan amount will increase during the period of the deferral and while no payments are being made); and what the borrower’s payments and loan term will be after the deferral period.
If repayments will be temporarily reduced
Make clear: the amount of the reduced payments; the period over which they will be reduced; and what the borrower’s payments and loan term will be after the period that reduced payments are made.
If extending loan term
Make clear: how long the loan has been extended for; when the loan is to be completely paid off; and whether the loan deferral and/or reduced payments and/or extended term mean that the borrower may have to pay more over the term of the loan, including more interest.
2. How to deal with unforeseen hardship applications?
The CCCFA provides a mechanism for a borrower to seek relief from a lender where the borrower cannot presently meet their repayment obligations, but will be able to do so in future if certain adjustments are made to their loan.
The Commission’s guidance indicates a more flexible approach to determining those assessments. As a practical matter, they note that the usual requirement for a written application may be waived and that “it may be appropriate for lenders to accept variation applications by telephone if circumstances make it difficult for applications to be made in writing.”
3. What disclosure is required?
The CCCFA requires lenders to make various detailed forms of disclosure, including at the outset of the loan, upon any variation, and on a continuing basis throughout the loan.
The Commission says that lenders should take all reasonable steps to continue to provide disclosure in compliance with the CCCFA. However, the guidance clarifies that where typical communication channels are disrupted or delayed, lenders should make alternative means of disclosure even if not compliant with the strict wording of the Act and that the Commission would take that into account in the exercise of its enforcement discretion. For example, the Commission encourages lenders to provide disclosure verbally. They recommend that lenders keep records of the steps that they have taken to provide disclosure.
4. What fees can be charged?
The Guidance also includes a warning about fees. It notes that, unless specifically allowed to do so in the contract, lenders should not seek to introduce new fees or increase the amount of existing fees. All credit fees should be disclosed to the borrower before the contract is entered into. Unless the loan contract allows a lender to vary the amount of fees, lenders cannot change them unilaterally. Fees should reflect the costs that are closely connected with the matter giving rise to the fee. Unless lenders are able to demonstrate an increase in costs at this time, fees should not be increased.
Separately, the recently-introduced Credit Contracts and Consumer Finance (Exemptions for COVID-19) Amendment Regulations 2020 create an exemption for registered banks from certain requirements of the CCCFA. These apply where: borrowers experience, or reasonably expect to experience, financial difficulties due to the economic or health effects of COVID-19; and if the contract is an existing contract that is varied or replaced for the purpose of reducing those difficulties. Aside from this specific exemption all lenders remain subject to the CCCFA.
The Commission’s guidance is designed to assist the continuing provision of retail lending services during a period of major uncertainty, although untested legal questions will continue to emerge as matters evolve, and it may be that further regulatory guidance is necessary in due course.
In the meantime, if you are in any doubt as to the scope of your obligations under the CCCFA or the Responsible Lending Code, please contact the authors or your usual Bell Gully advisor.